BackFed seen looking past inflation to drop ‘considerable time’
Federal Open Market Committee will adopt a word such as 'patient' to describe its policy approach, economists predict
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Washington: The US Federal Reserve (Fed) will look past low inflation and drop a pledge to keep interest rates near zero for a “considerable time" as it seeks an exit from the loosest monetary policy in its 100-year history, economists said.
The Federal Open Market Committee (FOMC), which scheduled to meet on Tuesday and Wednesday in Washington, will adopt a word such as “patient" to describe its approach to policy, according to 68% of 56 economists surveyed by Bloomberg late last week. Only 23% said the committee will keep “considerable time", and a majority expect rates won’t rise at every meeting after liftoff in mid-2015.
Fed officials weighing when to tighten policy are likely to focus on a US jobless rate that’s fast approaching their goal for full employment, even as declining oil prices hold inflation below their target, economists said.
“There’s been very significant improvement in the labour market," said Brittany Baumann, an economist at Credit Agricole CIB in New York. “With regard to inflation, that’s where they’re missing, but that’s largely because of lower energy prices. We think the Fed views that as a transitory effect."
The FOMC will release its statement on Wednesday, along with forecasts for the benchmark federal funds rate, unemployment, inflation and growth.
The central bank cut the funds rate, the cost of overnight loans among banks, almost to zero in December 2008. Since then, it has relied on forward guidance, including phrases like “considerable time," to manage investor expectations for longer-term borrowing costs.
The Fed ended its third round of quantitative easing in October and repeated its view that “it likely will be appropriate to maintain the 0-0.25% target range for the federal funds rate for a considerable time" after asset purchases end.
“ ‘Considerable time’ has been around since September 2012, and its useful life is coming to an end" as the Fed prepares to to tighten policy, said Dana Saporta, director of US economic research at Credit Suisse Securities USA.
Fifty-nine percent of economists surveyed said the committee will emphasize falling unemployment as a reason to raise rates next year. Forty-one percent said the panel will cite too-low inflation as a reason to delay liftoff.
“No Fed in history has had such an easy policy with the economy so near to full employment," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.
US central bankers have reason to be upbeat about 2015. The economy is forecast to expand at a 2.9% pace, the fastest in a decade, according to a separate survey by Bloomberg, while falling gasoline prices leave consumers more money to spend on other goods, boosting confidence and retail sales.
Employers added 321,000 workers to payrolls last month, the most in almost three years. The jobless rate held at a six-year low of 5.8%, close to Fed officials’ 5.2-5.5% September estimate of full employment.
The FOMC will focus on the “net positive effects that lower oil prices will have on real economic activity, especially on consumer spending," Saporta said. Fed officials won’t “use slower headline inflation as a reason to delay rate increases."
The Fed’s preferred gauge of inflation, the personal consumption expenditures price index, rose at a 1.4% pace for the 12 months ending October, the 30th month it has stayed below the Fed’s 2% goal.
Persistently low inflation risks sliding into deflation, a debilitating decline in prices that increases the burden of debt and prompts consumers to hold off making purchases on the expectation goods will grow cheaper still.
Seventy-three percent of economists surveyed said they don’t forecast three consecutive months of inflation readings at 2% or higher until the first quarter of 2016 or later.
The median forecast of Fed officials in September called for the fed funds rate to rise to 1.375 percent at the end of 2015. Some 49% of respondents said the forecast would remain unchanged, while 31% said it would fall. Just one in five said it would increase. Bloomberg
Steve Matthews in Atlanta and Christopher Condon in Washington contributed to this story.
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